Tax Laws on Computer Expenses & Deductions

by Alia Nikolakopulos

Work and business computer expenses may be fully deductible.

Today’s world is technology driven. We use computers to draft documents, search the Web, create presentations, and meet with remote co-workers through video conferences and chat rooms. The Internal Revenue Service offers several options to deduct the cost of computers and related equipment when they’re used to produce taxable income.

Producing Income

The IRS doesn’t allow deductions for computer expenses that aren’t incurred to make money. This means in most cases, your personal home computer expenses aren’t deductible, unless you use the computer to research, track or trade investments. In this case, you’ll need to calculate the percentage of time your computer is used for personal and investment reasons. If you own a business and purchase the equipment for company use, or if you’re an employee and your boss requires that you buy a computer for work purposes, your expense is deductible as long as you’re not reimbursed for the cost. In most cases, you’ll depreciate your computer to recover its cost over time. However, K-12 educators are exempt from the depreciation rules. As of July 2012, a teacher can deduct up to $250 of work-related computer expenses on his tax return without filling out extra forms.

Eligible Computer Expenses

If you qualify for the deduction, the cost of your computer isn’t the only expense you can deduct. Software, printers, scanners and monitors are also eligible. If you consider your smartphone a work-related computer, you can deduct its cost. You can’t deduct the cost of printer ink, toner or paper as computer expenses – these are considered office supplies and may be deductible in another section of your return.

Depreciation

Computers, software and peripheral equipment you purchase are typically depreciated. Under regular depreciation methods, you’ll recover your expense over a few years, rather than taking a deduction for the entire cost in the year you purchase the computer or equipment. Claiming straight depreciation for your computer doesn’t make much sense because in most cases, technology advances faster than your computer can be fully depreciated. Currently, the IRS recovery period for computers is five years, but there is an option to take a full deduction for your computer in the year of purchase if you use a special depreciation allowance.

Section 179 Expenses

If recovering the cost of your computer items over the course of several years sounds worthless, don’t fret. The IRS allows full recovery in the year of purchase through Section 179. Section 179 has annual dollar limits – as of July 2012, this limit is $500,000 for most taxpayers. If your computer expense is less than this amount and you don’t use up the limit with other assets you’re writing off, you can claim all your computer expenses on IRS Form 4562.

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.